CRN Monthly Technology Spending Outlook, November 2004

1. Near-Term Sales Outlook
(Based on a survey of 225 VARs in October 2004)

Solution providers' near-term sales expectations edged higher in October vs. September, the second straight monthly increase. The overall spending expectations index rose to 103 in October, compared with 98 in September and the benchmark of 100 in May 2000.

Much of the increase, however, stemmed from a surge in the volatile Unix/RISC server category. If that gain were excluded, then overall sales expectations would have been virtually unchanged in October.

Four of the seven individual hardware and software categories drew higher sales expectations in October. As has been the case in recent months, notebooks led the way with the sales expectations index of 173, up 13 percentage points from September and not far from the record of 182 in June. Both branded and custom notebooks are seeing stronger sales growth, according to CRN research. Besides the aforementioned Unix/RISC server category, peripherals and desktops also saw increased sales expectations. Like notebooks, peripherals are nearing a record high in the sales expectations index.

Technology categories experiencing declined VAR sales expectations in October included networking hardware and software, along with PC servers. Networking sales expectations haven't changed much for more than a year, and a decline in sales expectations for PC servers wasn't surprising, considering that the category reached an all-time high in the September survey.

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In terms of business segments, solution provider sales expectations in October softened slightly for small, midsize and large companies. Nevertheless, expectations in the midsize- and large-company markets remain well above year-earlier levels, and expectations in the small-business segment are the strongest of the three company markets, as has been the case for more than a year.

With U.S. economic growth likely to stay in the 3 percent to 4 percent range over the next couple of quarters, the channel's overall sales expectations--and actual sales growth--should remain solid but steady over the short term

Spending Expectations Index CHART

Sales Expectations By Market Segment CHART

2. Small-Business IT Spending Plans
(Based on a CRN survey of 200 small-business IT executives in October 2004)

In the October CRN Business Spending Survey, 47 percent of the small companies (fewer than 100 employees) polled said they expect to hike their technology budget over the next year. That's down a bit from 50 percent in July, the last time these businesses were surveyed.

But there's a silver lining to the October results: Nearly three times as many small businesses plan to boost their IT budgets as those that expect to cut their budgets. What's more, the spending increases stand to be healthy. More than a third of businesses planning to raise spending expect an increase of 20 percent or more over the next year, and another 35 percent said the increase will be 11 percent to 20 percent.

Better still, small businesses planning to increase their IT budget are highly committed to doing so. In the October CRN Business Spending Survey, 79 percent of respondents said they're "extremely committed" or "strongly committed" to enacting planned spending hikes, up from 65 percent in the July poll. That's a good sign that VARs will actually see some of those dollars coming their way.

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On the technology side, some areas will see faster growth than others, and solution providers will need to hone their sales strategies accordingly. CRN has identified five IT categories that offer the best opportunities for channel sales growth to small businesses: CRM, VoIP, notebooks, Unix servers and access to legacy systems. In each of those categories, the level of spending priority was higher in October vs. July, and the October 2004 priority level was higher than the October 2003 level. So those IT segments are increasing in importance to small businesses over the short term and the long term.

Other categories likely to see solid growth rates over the next three to six months include security, wireless, storage, desktop PCs and networking, according to CRN research.

These trends reflect solution providers' near-term sales expectations, which are highest in security-related categories such as antispam, antivirus, and intrusion detection. Wireless LANs and Web services also rank high when it comes to expectations for sales growth.

Small-Business IT Budget Forecast, Next 12 Months CHART

3. Channel Satisfaction And Loyalty
(Based on October CRN Channel Satisfaction Survey, with at least 30 VARs polled for each company listed)

In October, Samsung was added to the list of vendors covered in the CRN Monthly Channel Satisfaction Survey, and the company immediately climbed to the top of the list in terms of channel satisfaction and channel loyalty.

Samsung posted an overall channel satisfaction rating of 65 percent, seven percentage points higher than second-place IBM and 17 percentage points above the average for all 18 vendors covered. The overall satisfaction level is defined as the percentage of solution providers satisfied with a vendor's channel programs minus the percentage dissatisfied.

Turning to channel loyalty, Intel topped the list with an overall rating of 60 percent among its VAR partners. Newcomer Samsung came in second at 58 percent. The overall loyalty rating is defined as the percentage of respondents citing a "high" or "very high" level of loyalty minus the percentage citing a "low" or "very low" level of loyalty.

For most vendors, the partner loyalty level is lower than the channel satisfaction level--and in some cases, the loyalty rating is significantly lower, as is the case with Novell, Symantec, ViewSonic, Lexmark and 3Com. This suggests those vendors may have some work to do in terms of cultivating channel partner loyalty, since it stands to reason that a higher level of partner satisfaction should correspond to a higher level of loyalty. Only five of the 18 vendors surveyed had a higher level of partner loyalty than partner satisfaction: Intel, Cisco Systems, Veritas Software, Citrix and Hewlett-Packard.

The top four distributors--Ingram Micro, Tech Data, Synnex and D&H Distributing--also have been added to the CRN Monthly Channel Satisfaction Survey. On average, these distributors have much lower levels of channel satisfaction and loyalty compared with vendors. And as was the case with most vendors, the distributors' partner satisfaction ratings topped their partner loyalty ratings, such as with Tech Data and Synnex.

NOTE: Last month, CRN significantly reduced the length of its Channel Satisfaction Survey to make it quicker and easier for VARs to complete. As a result, the October results for satisfaction and loyalty aren't directly comparable to previous months' figures.

VAR Satisfaction With Channel Programs CHART

VAR Loyalty To Vendors And Distributors CHART

4. Best-Selling Hardware Brands
(Based on a CRN survey of 225 VARs in October 2004)

On average, data for the best-selling hardware brands showed unusual stability in October, as the magnitude of changes were smaller than in recent months.

October's top performer among major vendors was Hewlett-Packard, which had slight increases in the percentage of solution providers citing its desktops and notebooks as their best-sellers, with a bigger gain in the desktop market. However, HP saw a decline in its Unix/RISC server percentage and, in all categories except notebooks, its October 2004 figures were much lower than comparable data the year before.

Dell saw an uptick in the percentage of VARs naming its notebooks as their top sellers, but its percentages for desktops and PC servers dipped. Dell maintains a solid lead over HP in the desktop space, and the two vendors are locked in a tight battle in the notebook and server segments.

IBM registered the worst performance in October among the top three branded vendors. Although Big Blue saw a gain in the share of VARs citing its Unix/RISC servers as their best-selling units, the company had declines in the percentages for desktops, notebooks and PC servers.

On the other hand, custom-system builders showed strong gains in the percentage of solution providers citing their notebooks and PC servers as their top sellers. In the notebook arena, the "whitebook" percentage exceeded Toshiba's and was tied with IBM's. Custom systems continue to hold a dominant position in the desktop and PC server markets, and white boxes remain in a tight battle with IBM for pre-eminence in the Unix/RISC server space.

The decline of Sun Microsystems in the Unix/RISC server market deserves special mention. Since the fourth quarter of 2002, Sun has seen a drop of 20 percentage points in its best-selling figure, from around 32 percent to 12 percent. Other vendors--particularly IBM--have picked up Sun's lost market share, as have custom-system makers.

Percentage Of VARs Citing Each As Their Top-Selling Computer CHART

5. Custom Systems and Component Availability
(Based on a CRN survey of 225 VARs in October 2004)

A big chunk of white-box VARs are turning to other system builders for at least some of their desktops, notebooks and servers. That represents a significant opportunity for system builders to boost sales and profits, given the hot market for custom-systems.

For example, two-thirds of solution providers in the custom-server market use other system builders to make the units for them, and nearly half of those solution providers outsource these systems exclusively. In desktops, 75 percent of VARs selling white boxes outsource at least partially, compared with 90 percent for those selling whitebooks. The notebook category is big for system builders, as 72 percent of whitebook VARs exclusively outsource construction of these units.

On the supply side, component shortages decreased in microprocessors, video graphics cards, hard drives and memory in October vs. September. LCDs also saw improved supply, as reflected in that category's continued price declines. Only the motherboard and NIC segments saw an increase in the percentage of custom-system builders reporting shortages. Fortunately, the increases were modest.

White Boxes: Build Or Buy? CHART

Component Availability CHART